Price volatility and store of value

James asks: “Store of value in a volatile market.
My smart friend says, that the biggest barrier to mass adoption is price volatility which limits bitcoins use as a store of value. It’s most convincing use case to date. It’s a lousy store of value if the price keeps changing. Is this right? Are there other obstacles to mass adoption? What are they in your opinion?”
James, your friend may be smart, but I don’t think they understand some of the basic economics of play here. So, first of all, I don’t think price volatility really effects bitcoins use as a store of value. Store of value is definitely a long term perspective. It certainly affects bitcoins use added as a medium of exchange, but as a store of value, you know if you are buying and investing in Bitcoin and using it as a store of value, then you have a long term perspective certainly more than a year.
How is Bitcoin doing in the last year? Oh, it’s it’s up about six hundred percent. Sounds like a pretty good store of value to me. Over the last three years? Definitely pretty good store of value, if you look at it over three months, it’s probably not a good store of value. But that’s not what store of value means, store of value is definitely a long term perspective. The other thing about this is that it’s a bit of a circular argument, because, volatility really is an expression of size.
For example, in a follow-up question, James said: “We tend to harbor an expectation that this volatility a key obstacle to bitcoins wider success will eventually calm down, but bitcoins resistance to regulation is a feature not a bug, so, where will the stability come from absent of mass adoption and absence of regulation?”
I think there’s a broad misunderstanding about how volatility is dealt with in capital markets and currency markets. The idea that regulators control volatility in the currency I think is an illusion. Regulation doesn’t control volatility. If anything regulated markets that don’t have enough flexibility and liquidity are more volatile, I would say the biggest contributor to volatility, is the small size of a currency and you’ve got to understand that bitcoin is currently traded on a global basis, unlike most other national currencies that have primarily domestic markets Bitcoin is a global market and for a global market. It’s tiny. It really is absolutely tiny; 100 billion dollars is nothing in currencies. Even for a currency that’s only domestic let alone for a currency this traded globally.
So this kind of sounds like a circular argument is basically saying the biggest barrier to mass adoption is the lack of mass adoption and if only there was more mass adoption than that be more mass adoption. The biggest barrier to Bitcoin being big is that Bitcoin is small and if only Bitcoin was bigger than it could be bigger. Because that’s what price volatility is. It’s that this currency is small and so if the fact that it’s small is a barrier to it becoming big that’s kind of circular logic. As Bitcoin gets bigger volatility goes down as the market becomes more liquid as it is traded more and used for different purposes and not just speculation I think that reduces volatility. The more companies depend on Bitcoin is an input or use it for payments to contractors or providers or hold inventory and purchase things based on Bitcoin or sell things based on Bitcoin the more the price volatility is reduced.
Right now, it’s mostly used for speculation. It’s mostly dealt with as a short-term basis. It’s traded globally in a wide open market and as a result is quite volatile. So, yes, Bitcoin will become less volatile as it grows, or at least I certainly hope it will, I think the economics would argue that.
Ash asks: “Do you believe there are cartels in the crypto space? There is lots of noise about Bitcoin being manipulated than such things. What do you think?”
I think the lady doth protest too much. What I would say is I wasn’t hearing a lot of complaining about Bitcoin being manipulated when it increased five six eight hundred, thousand percent in six months. There wasn’t much complaining about manipulation and pumping and all of that when the price was going up by a factor of ten. Now when the price is going down, for obvious reasons, anything that goes up a thousand percent in six months is bound to have a correction. And I had started calling for a correction in October of lastyear and saying that these prices are unsustainable, and I gotquite roundly bashed for that for being a naysayer anda negative Nelly and all of that. But the point is that anything that goes up a thousand percent is likely to have a correction, at some point if it goes up too fast, it’s going to come down even faster. As they say in trading: “what goes up on an escalator comes down on an elevator”.
And in this particular case now, we have a lot of people going on about how Bitcoin is being manipulated by Wales, by the futures market, by world governments trying to dump crypto holdings in order to tank the market, etc, etc…
But the truth is that if you look at the broader market, it’s not just Bitcoin. There’s been a massive correction in tech stocks. There’s been massive corrections in stock markets around the world. There have been massive corrections in currencies. And now there are also massive corrections happening in crypto. And this is I think a natural response to a market that got over exuberant with too much excitement too.
Many people bought Bitcoin and other cryptocurrencies not because they believed in or understood the value of the technology, not because they thought this technology was going to have a great potential for future returns, but they thought that they would get rich in a matter of months, simply by buying into a fad. That is a greater fool theory, that is not a good basis to invest in.
And so, when people were asking me: “You know, Bitcoin is $16,000. Should I buy now?” I honestly told people: “you know your strategy should be based on dollar cost averaging and figuring out what you’re comfortable with and understanding the technology,and the more you understand of the technology the more comfortable you should be about your investment decisions.” And if you’re asking me and I’m not an investment advisor, then you shouldn’t be buying this stuff.
So yeah, I don’t believe there are cartels in the crypto space Do I believe there’s manipulation? Sure? Absolutely. Do I believe that there’s various pump and dump schemes and whales trying to manipulate the price and completely irrational buying and completely irrational selling that’s pushing the price around? Absolutely, all of that is happening. But that’s not the reason that the price is crashing.
And I think trying to find causation in these markets is a fool’s game, It’s like reading tea leaves or predicting stock prices based on the alignment of the zodiac.